What is the Zig Zag Indicator formula and how is it calculated?

The zig zag indicator is a basic tool that analysts use to find out when a security's trend is reversing. By determining the support and resistance areas, it helps to identify significant changes in price while filtering out short-term fluctuations, thus eliminating the noise of everyday market conditions. It is an excellent tool for any trader who follows indicators that use swing highs and swing lows.

The Zig Zag Indicator

To use the zig zag indicator, a percentage of price movements must be set. Although the default value for a zig zag is 5%, a setting of 9% would ensure that only price fluctuations of 9% or more would be shown in the chart. This eliminates smaller price swings and allows the analyst to see the bigger picture. Normally, closing prices of securities are used, and imaginary points are placed on the given chart where the price reverses by the set percentages. These points are then connected by straight lines and the required information appears.

How to Use the Zig Zag Indicator

The zig zag indicator is an effective tool for analyzing historical data. It is only based on hindsight and is not predictive in any way. It is based on the past prices of securities and cannot forecast the next swing highs and swing lows.

Fibonacci numbers and lines are technical tools for traders based on a mathematical sequence developed by an Italian mathematician. These numbers help establish where support, resistance, and price reversals may occur.

The Fibonacci channel is a variation of the Fibonacci retracement tool. With the channel, support and resistance lines run diagonally rather than horizontally. It is used to aid in making trading decisions.